Watchdog mulls hedge fund shake-up

Price check: Interest in hedge funds is growing

The Financial Services Authority is debating whether to allow ordinary savers to put their money into high-risk 'hedge funds'.

Hedge funds, currently the preserve of the wealthy, aim to maximise returns through potentially lucrative but risky investment strategies.

The City watchdog said its move came in response to rapid growth in the hedge fund industry, raising the possibility that ordinary investors might start taking an interest in their products and services.

"Hedge funds cannot readily market themselves direct to the UK public... but financial advisers may recommend investors who understand the risks to put some money in them," said Michael Folger, the FSA's Director of Conduct of Business Standards.

"Is this the right balance or is there scope to make hedge funds more accessible?"

Marketing rules

The FSA is seeking comments from the financial services industry and consumer groups on whether it should relax existing restrictions on the sale and marketing of hedge funds.

Any changes to the marketing restrictions would be accompanied by new rules aimed at protecting and educating consumers, the FSA stressed.

"There are legitimate concerns about the comprehensibility to retail investors of the information provided by hedge funds about their activities and risk profiles," the watchdog said in a statement.

Reluctance

Most hedge funds, while keen to capitalise on growing interest from ordinary investors, are thought to be reluctant to take on the extra obligations that this would entail.

"We'd love retail money. But the hassle is too much," Crispin Odey, head of Odey Asset Management, told the Reuters news agency.

Hedge funds have attracted negative publicity this year, with some City figures accusing them of exacerbating the recent stock market slump through short-selling.

Short-selling - where traders borrow shares and sell them in the expectation that the price is about to fall - is a favoured tactic of hedge funds, but is legally off-limits to mainstream pension funds.

Hedge funds scored some spectacular successes in the 1990s, generating annual returns of 30% or more for investors.

But the 1998 collapse of the US-based LTCM hedge fund, which had invested heavily in the crisis-hit Russian market, sent tremors through financial markets worldwide.